UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-26463
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MILITARY RESALE GROUP, INC.
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(Name of small business issuer in its charter)
New York 11-2665282
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(State or other jurisdiction of incorporation or I.R.S. Employer Identification No.
organization)
2180 Executive Circle, Colorado Springs, Colorado 80906
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (719) 391-4564
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure is contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State registrant's revenues for its most recent fiscal year. $6,359,803
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As of March 31, 2003, the registrant had outstanding 11,975,804 shares of its
common stock.
As of March 31, 2003, the aggregate market value of the registrant's common
stock held by non-affiliates was $2,874,192.96 (based upon the closing price
($0.24) of the registrant's common stock on The OTC Bulletin Board on such
date).
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
MILITARY RESALE GROUP, INC.
FORM 10-KSB/A
AMENDMENT NO. 1 TO 2002 ANNUAL REPORT
TABLE OF CONTENTS
Page No.
INTRODUCTORY NOTE .................................................... ii
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS ............................... 1
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION ...................... 3
ITEM 7. FINANCIAL STATEMENTS ................................ 7
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTIONS 16(A)
OF THE EXCHANGE ACT ................................ 8
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ACT ................................ 9
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K ............ 11
SIGNATURES ........................................................... 12
CERTIFICATIONS ....................................................... 13
i
INTRODUCTORY NOTE
We are filing this Form 10-KSB/A in order to amend our disclosure of
information in Items 5, 6, 7, 9 and 11 of our Annual Report on Form 10-KSB filed
with the Commission on May 2, 2003. The principal changes we made were as
follows: (i) we added disclosure in Item 5 regarding sales of unregistered
securities during 2001 and 2002 which were not disclosed in our Form 10-KSB,
(ii) we added disclosure in Item 6 regarding two supplier contracts and the
acceleration of certain capital lease obligations, (iii) we added disclosure in
Item 9 regarding Section 16(a) beneficial ownership reporting compliance and
(iv) we revised the beneficial ownership table in Item 11 to conform to the
disclosures made in recent filings with the Commission by certain beneficial
owners on Forms 3 and 4. This Form 10-KSB/A does not necessarily reflect events
occurring after the filing of the original Form 10-KSB.
ii
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
RECENT SALES OF UNREGISTERED SECURITIES
2000 None.
2001
On August 1, 2001, Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), issued options to purchase 1,000,000 shares of its common
stock to Ronald Steenbergen, a consultant. In connection with our purchase of
98.2% of the outstanding capital stock of MRG-Maryland in a reverse acquisition
(the "Reverse Acquisition"), we assumed the obligations under the option. Such
options were exercisable for one year at an exercise price of $0.50 per share
and expired in August 2002 without having been exercised. Such options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In November 2001, we issued an aggregate of 5,410,000 shares of our
common stock to the eleven stockholders of MRG- Maryland in connection with the
Reverse Acquisition. Such shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons represented to us that they were `accredited investors' as defined
in Regulation D under the Securities Act of 1933, as amended.
In December 2001, we issued an aggregate of 875,000 shares of our
common stock to an aggregate of 13 of our employees and directors as bonus
compensation for services rendered in 2001. As no additional consideration was
paid to the Company by the recipients of such shares, such issuances were not
"offers" or "sales" as defined in the Securities Act of 1933, as amended, nor
subject to the registration requirements of the Securities Act of 1933, as
amended.
In December 2001, we issued $35,000 aggregate principal amount of
convertible notes to two purchasers. Such notes are convertible at any time and
from time to time by the noteholders into a maximum of 525,000 shares of our
common stock (subject to certain anti-dilution adjustments) if such convertible
notes are not in default, or a maximum of 1,050,000 shares of our common stock
(subject to certain anti-dilution adjustments) if an event of default has
occurred in respect of such convertible notes. The terms of such convertible
notes require us to register under the Securities Act of 1933 the shares our
common stock issuable upon conversion of such convertible notes not later than
June 30, 2003. Such notes were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
2002
In the first six months of 2002, we issued $205,000 aggregate principal
amount of convertible notes to nine purchasers. At the time of issuance, such
notes were convertible at any time and from time to time by the noteholders into
a maximum of 3,075,000 shares of our common stock (subject to certain
anti-dilution adjustments) if such convertible notes are not in default, or a
maximum of 6,150,000 shares of our common stock (subject to certain
anti-dilution adjustments) if an event of default has occurred in respect of
such convertible notes. The terms of such convertible notes require us to
register under the Securities Act of 1933 the shares our common stock issuable
upon conversion of such convertible notes not later than June 30, 2003. Such
notes were issued in reliance upon the
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exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were `accredited investors' as defined in Regulation D
under the Securities Act of 1933, as amended.
In April 2002, we issued an aggregate of 1,993,573 restricted shares of
our common stock to two holders of our convertible promissory notes in
connection with the conversion of $150,000 aggregate principal amount of such
notes plus $2,380 of accrued interest thereon into shares of our common stock.
Such shares were issued by us in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
In May 2002, we issued 36,775 shares of our common stock to each of
Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer, pursuant to the terms of a consulting agreement. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In July 2002, we issued options to purchase an aggregate of 300,000
shares of our common stock to consultants for services rendered. Such options
are one-year options that have an exercise price of $0.50 per share and expire
on July 1, 2003. Such options were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In July 2002, we issued 75,000 shares of our common stock to a
consultant for services rendered. Such shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such person was an 'accredited investor' as defined in Regulation D
under the Securities Act of 1933, as amended.
In August 2002, we issued an aggregate of 619,540 shares of our common
stock to five consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the second half of 2002, we issued $165,000 aggregate principal
amount of convertible promissory notes that mature on either June 30, 2003 or
July 30, 2003 and bear interest at the rate of 8% per annum. Such notes are
convertible at any time and from time to time by the noteholders into a maximum
of 990,000 shares of our common stock (subject to certain anti-dilution
adjustments).The terms of the such notes require us to register under the
Securities Act of 1933 the shares of our common stock issuable upon conversion
of the notes not later than June 30, 2003. Such notes were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In September 2002, we issued 95,861 shares of our common stock to each
of Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer (or their designees), pursuant to the terms of a consulting agreement.
Such shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such persons were
'accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In October 2002, we issued an aggregate of 250,000 shares of our common
stock to a consultant for services rendered. In connection with such issuance,
we granted "piggy-back" registration rights to the consultant. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an 'accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended. The
consulting agreement provides that we will issue additional shares of our common
stock upon the consultant's achievement of certain performance goals.
In November 2002, we issued an aggregate of 300,000 shares of our
common stock to a consultant for services rendered. In connection with such
issuance, we granted "piggy-back" registration rights to the consultant. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such person was an 'accredited
investor' as defined in Regulation D under the Securities Act of 1933, as
amended.
In November 2002, we granted one of our lenders a five-year option to
purchase 500,000 shares of our common stock at an exercise price of $0.50 per
share in consideration of the lender's willingness to extend the term of its
loan to the Company for an additional six months. Such options were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an 'accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In January 2003, we issued 96,207 shares of our common stock to
each of Edward Meyer and Edward Whelan, our Chairman of the Board and Chief
Executive Officer (or their designees), pursuant to the terms of a consulting
agreement. Such shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were 'accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
2
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. The
words "believe", "expect", "anticipate", "intend" and "plan" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made. Because our common stock is considered a "penny
stock," as defined by the regulations of the Securities and Exchange Commission,
the safe harbor for forward-looking statements does not apply to statements by
our company.
Our business and results of operations are affected by a wide variety
of factors that could materially and adversely affect us and our actual results,
including, but not limited to: (1) the availability of additional funds to
enable us to successfully pursue our business plan; (2) the uncertainties
related to the addition of new products and suppliers; (3) our ability to
maintain, attract and integrate management personnel; (4) our ability to
complete the development of our proposed product line in a timely manner; (5)
our ability to effectively market and sell our products and services to current
and new customers; (6) our ability to negotiate and maintain suitable strategic
partnerships and corporate relationships with suppliers and manufacturers; (7)
the intensity of competition; and (8) general economic conditions. As a result
of these and other factors, we may experience material fluctuations in future
operating results on a quarterly or annual basis, which could materially and
adversely affect our business, financial condition, operating results and stock
price.
Any forward-looking statements herein speak only as of the date hereof.
We undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following discussion should be read in conjunction
with the financial statements and related notes appearing elsewhere in this
Report.
Prior to November 15, 2001, we did not generate any signification
revenue, and accumulated no significant assets, as we explored various business
opportunities. On November 15, 2001, we acquired 98.2% of the issued and
outstanding capital stock of Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), in exchange for a controlling interest in our publicly-held
"shell" corporation. For financial reporting purposes, MRG-Maryland was
considered the acquirer in such transaction. As a result, our historical
financial statements for any period prior to November 15, 2001 are those of
MRG-Maryland.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED
DECEMBER 31, 2001
Revenues. Total revenue for the year ended December 31, 2002 of
$6,359,803 reflected an increase of $1,508,370, or approximately 31.1%, compared
to total revenue of $4,851,433 for the year ended December 31, 2001. Our
revenues are derived in either one of two ways. In the majority of instances, we
purchase products from manufacturers and suppliers for resale to the
commissaries we service. In such cases, we resell the manufacturer's or
supplier's products to the commissaries at generally the same prices we pay for
such products, which prices generally are negotiated between the manufacturer or
supplier and the Defense Commissary Agency ("DeCA"). Revenue is recognized as
the gross sales amount received by us from such sales ("resale revenues"), which
includes (i) the purchase price paid by the commissary plus (ii) a negotiated
storage and delivery fee paid by the manufacturer or supplier. In the remaining
instances, we act as an agent for the manufacturer or supplier of the products
we sell, and earn a commission paid by the manufacturer or supplier, generally
in an amount equal to a percentage of the manufacturer's or supplier's gross
sales amount ("commission revenues"). In such cases, revenue is recognized as
the commission we receive on the gross sales amount.
Resale revenue for the year ended December 31, 2002 of $6,015,406
reflected an increase of $1,455,059, or approximately 32.0%, compared to resale
revenue of $4,560,347 for the year ended December 31, 2001. For the year
3
ended December 31, 2002, approximately 61.2% of our gross profit was derived
from sales involving resale revenue compared to approximately 49.1% for the year
ended December 31, 2001. These increases were attributable primarily to the
addition of the new products we began supplying to commissaries during the
fourth quarter of fiscal 2001, including Slimfast, L'eggs, Bush Beans and
Rayovac Batteries, and during fiscal 2002, including Hillshire Farm and Kahn's
product groups of Sara Lee Foods-USA, that we sell on a resale basis. In
addition, during the year ended December 31, 2002, we implemented our long-term
strategy to increase the ratio of our sales of products we sell on a resale
basis, rather than a commission basis, due to the payment discounts we often
receive from the manufacturers and suppliers of the goods we purchase for
resale.
Commission revenues for the year ended December 31, 2002 of $344,397
reflected an increase of $53,311, or approximately 18.3%, compared to commission
revenues of $291,086 for the year ended December 31, 2001. For the year ended
December 31, 2002, approximately 38.8% of our gross profit was derived from
sales involving commission revenues as compared to approximately 50.9% for the
year ended December 31, 2001. These decreases were attributable primarily to the
implementation of our long-term strategy to increase the ratio of our sales of
products sold on a resale basis, rather than a commission basis. We cannot be
certain as to whether or not these trends will continue; however, in the long
term we are seeking to increase the ratio of our sales of products sold on a
resale basis, rather than a commission basis, because we believe we can increase
our profitability on such sales by taking advantage of payment discounts
frequently offered by the manufacturers and suppliers of such products. To do
so, we intend to continue to seek to add new products that we can offer to
commissaries on a resale basis from our existing manufactures and suppliers and
from others with whom we do not currently have a working relationship.
In March 2002, we entered into an agreement with Playtex Products, Inc.
to distribute, on a resale basis, approximately 70 Stock Keeping Units (SKUs)
manufactured or supplied by Playtex, including a line of feminine hygiene
products and a line of infant feeding products. We have been advised by Playtex,
and verified with DeCA, that sales by Playtex in 2001 to the commissaries we
currently service amounted to approximately $350,000. However, there can be no
assurance that our annual sales of Playtex products will reach such amount, and
the amount of our actual sales of Playtex products may differ materially from
the amounts sold by Playtex in 2001 as a result of one or more of the factors
described above, among others. In the third quarter of 2002, Playtex Products,
Inc. suspended the sale of its products to us pending our payment of an
outstanding invoice in the approximate amount of $12,000 for products previously
shipped to us. To date, we have not made such payment and all sales by Playtex
remain suspended. We intend to make the outstanding payment in the second
quarter of 2003, upon which our management believes Playtex will resume the sale
of its products to us pursuant to the terms of our agreement. For the year ended
December 31, 2002, approximately $38,000 of our total revenues was derived from
the sale of Playtex products.
In April 2002, we began distributing products for Pfizer, Inc. under an
agreement that provided for the distribution of approximately 114 SKUs of Pfizer
products. In June 2002, the agreement was terminated by Pfizer because we were
unable to consistently meet our delivery obligations due to our insufficient
working capital. During the term of our agreement with Pfizer, we received
revenue from the sale of Pfizer products of approximately $168,000. Management
believes the termination of the Pfizer agreement did not have a material adverse
impact on our results of operations for fiscal 2002.
In October 2002, we added to our supplier network the Hillshire Farm
and Kahn's product groups of Sara Lee Foods-USA and certain consumer products
distributed by Chattem, Inc. Hillshire Farm and Kahn's are product lines of
packaged meats and hams. Chattem is a manufacturer of branded consumer products,
principally over-the-counter healthcare products, including Aspercreme, Gold
Bond, Sportscreme, Pamprin, Dexatrim, Rejuvex and Flexall. We have been advised
by Sara Lee Foods-USA, and verified with DeCA, that sales of Hillshire Farm and
Kahn's products in 2001 to the commissaries we currently service amounted to
approximately $950,000. We have been advised by Chattem, and verified with DeCA,
that sales of Chattem's line of products in 2001 to the commissaries we
currently service amounted to approximately $200,000. However, there can be no
assurance that our annual sales of these products will reach such amounts, and
the amount of our actual sales of Hillshire Farm and Kahn's Products and Chattem
products may differ materially from the amounts sold by Sara Lee Foods-USA and
Chattem, respectively, in 2001. Pursuant to our agreements with Chattem, Inc.
and Sara Lee Foods-USA, we purchase products for resale to commissaries. Our
agreement with Sara Lee Foods-USA has a one-year term and automatically renews
for successive one-year periods. It is cancelable by such supplier upon 30 days'
written notice. Our agreement with Chattem, Inc. has no defined term and is
cancelable by such supplier upon 30 days' written notice.
4
Management believes our long-term success will be dependent in large
part on our ability to add additional product offerings to enable us to increase
our sales and revenues. However, we believe our ability to add additional
product offerings is dependent on our ability to obtain additional capital to
fund new business development and increased sales and marketing efforts. We are
currently in discussions with a number of other manufacturers and suppliers in
an effort to reach an agreement under which we can distribute their products to
the military market. While there can be no assurance that we will do so, we
believe we will be successful in negotiating agreements with a number of such
suppliers and manufacturers.
To date, all of our sales revenue has been generated from customers
located in the United States.
Cost of Goods Sold. Cost of goods sold consists of our cost to acquire
products from manufacturers and suppliers for resale to commissaries. In
instances when we sell products on a commission basis, there is no cost of goods
sold because we act as an agent for the manufacturer or supplier and earn only a
commission on such sales. During the year ended December 31, 2002, cost of goods
sold increased by approximately $1,192,397, or approximately 27.9%, to
$5,471,846 from $4,279,449 for the year ended December 31, 2001. This increase
was attributable primarily to the addition of new products that we sold on a
resale basis. We cannot be certain as to whether or not this trend will
continue; however, in the long term we are seeking to increase the ratio of our
sales on a resale basis, as discussed above.
Gross Profit. Gross profit for the year ended December 31, 2002
increased by approximately $315,973, or approximately 55.2%, compared to the
year ended December 31, 2001, from $571,984 for the year ended December 31, 2001
to $887,957 for the year ended December 31, 2002. This increase was attributable
primarily to addition of new products that we purchased for resale to the
commissaries we service.
Operating Expenses. Total operating expenses aggregated $2,703,864 for
the year ended December 31, 2002 as compared to $1,271,223 for the year ended
December 31, 2001, representing an increase of $1,432,641, or approximately
113%. The increase in total operating expenses was attributable primarily to
increased professional fees of approximately $348,221 resulting primarily from
the costs of the preparation of a registration statement under the Securities
Act of 1933 relating to a proposed offering of equity securities; increased
stock-based compensation expense of $460,761 resulting primarily from the
issuance of shares of our common stock and options to purchase shares of our
common stock to our consultants; increased occupancy expense of $146,734
resulting from our move to larger office and warehouse facilities in September
2001; and increased general and administrative expenses of $386,263 resulting
primarily from increased truck rental expense and increased premiums on health
workers' compensation insurance.
Interest Expense. Interest expense of $477,059 for the year ended
December 31, 2002 reflected an increase of $430,304 as compared to interest
expense of $46,755 for the year ended December 31, 2001. The increase in
interest expense was attributable primarily to interest expense resulting from
the recognition of the beneficial conversion feature (the right to convert debt
into shares of our common stock at a discount to the fair market value of our
common stock) of $370,000 aggregate principal amount of convertible promissory
notes issued in the year ended December 31, 2002.
Net Loss. Primarily as a result of the increased operating and interest
expenses discussed above, we incurred a net loss of $2,319,221 for the year
ended December 31, 2002 as compared to a net loss of $745,994 for the year ended
December 31, 2001.
Liquidity and Capital Resources
At December 31, 2002, we had a cash balance of approximately $2,100.
Our principal source of liquidity has been borrowings. Since November 2001, we
have funded our operations primarily from borrowings of approximately $475,000.
In the fourth quarter of 2001 and the first half of 2002, we issued $240,000
aggregate principal amount of convertible promissory notes (the "9% convertible
notes") that mature, in nearly all instances, on June 30, 2003 and bear interest
at the rate of 8% per annum prior to June 30, 2002 and 9% per annum thereafter.
In April 2002, $150,000 aggregate principal amount of 9% convertible notes (and
$2,380 accrued interest thereon) was converted by the holders into an aggregate
of 1,793,573 shares of our common stock. The remaining 9% convertible notes are
convertible at any time and from time to time by the noteholders into a maximum
of 1,350,000 shares of our common stock (subject to
5
certain anti-dilution adjustments) if the 9% convertible notes are not in
default, or a maximum of 2,700,000 shares of our common stock (subject to
certain anti-dilution adjustments) if an event of default has occurred in
respect of such notes. The terms of the 9% convertible notes require us to
register under the Securities Act of 1933 the shares our common stock issuable
upon conversion of the 9% convertible notes not later than June 30, 2003. In
July 2002, the holders of $20,000 aggregate principal amount of convertible
notes maturing on June 30, 2002 denied our request to extend the maturity until
July 30, 2003. The outstanding principal and interest on such convertible notes
have not yet been paid and, thus, such convertible notes are currently in
default. We intend to repay the outstanding principal and interest on such
convertible notes using cash flow generated from operations and, if necessary,
through additional borrowings. Management believes that our default under such
convertible notes will not have a material impact on our liquidity position, nor
will it materially alter our use of capital resources.
The terms of our 9% convertible notes and 8% convertible notes
(discussed below) provide generally that, if the convertible notes are not in
default, the holders may convert, at any time and from time to time, all or a
portion of the outstanding balance under each convertible note into a number of
shares (subject to certain anti-dilution adjustments) of our common stock that
will allow the noteholder to receive common stock having a market value equal to
150% of the converted balance of the note. To achieve this result, the
conversion price of such notes has been initially set at $0.50; provided, that
the closing price per share of our common stock as reported on the OTC Bulletin
Board on the date of conversion is at least $0.75 per share. If such closing
price is less than $0.75 per share, the conversion price shall be
proportionately reduced, but in no event to a conversion price that is less than
$0.10 per share in the case of 9% convertible notes or $0.25 per share in the
case of 8% convertible notes, to permit the noteholder to receive the number of
shares discussed above. If an event of default has occurred in respect of a 9%
convertible note, the holder may convert the outstanding balance into a number
of shares (subject to certain anti-dilution adjustments) of our common stock
equal to twice the number of shares the holder would have otherwise received if
such 9% convertible note was not in default.
In the second half of 2002, we issued $165,000 aggregate principal
amount of convertible promissory notes (the "8% convertible notes") that mature
on either June 30, 2003 or July 30, 2003 and bear interest at the rate of 8% per
annum. The 8% convertible notes are convertible at any time and from time to
time by the noteholders into a maximum of 990,000 shares of our common stock
(subject to certain anti-dilution adjustments). The terms of the 8% convertible
notes require us to register under the Securities Act of 1933 the shares of our
common stock issuable upon conversion of the 8% convertible notes not later than
June 30, 2003.
In the first quarter of 2003, we borrowed an aggregate of $10,000 from
Edward T. Whelan, our Chief Executive Officer and Chairman of our Board of
Directors. The loan is payable on demand and bears interest at the rate of 10%
annum.
In January and March 2003, we issued $15,000 aggregate principal amount
of convertible promissory notes that mature on June 30, 2003 and bear interest
at 8% per annum. Such notes are convertible at any time and from time to time by
the noteholders into a maximum of 225,000 shares of our common stock (subject to
certain anti-dilution adjustments). The terms of such notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of such notes not later than June 30, 2003.
In March 2003, we borrowed $100,000 from a single lender. The loan
matures on March 26, 2004 and bears interest at 15% per annum. The loan contains
contingent payment terms which vary depending on the success of our efforts to
raise additional funding.
In February 2003, one of our capital lease obligations in the
approximate amount of $35,000, which is secured by equipment with a net book
value of $25,363, was accelerated by the lessor due to non-payment. Management
has contacted such lessor to negotiate alternative payment arrangements for this
obligation. If unsuccessful, the lessor could bring suit to collect payment or
foreclose upon the collateral. Any such litigation may hinder our ability to
raise or obtain the capital we require or have an adverse impact on the terms
upon which we are able to attract or obtain such capital.
Our current cash levels, together with the cash flows we generate from
operating activities, are not sufficient to enable us to execute our business
strategy. As a result, we intend to seek additional capital through the sale of
up to 5,000,000 shares of our common stock. In December 2001, we filed with the
Securities and Exchange Commission a
6
registration statement relating to such shares. Such registration statement has
not yet been declared effective, and there can be no assurance that the
Securities and Exchange Commission will declare such registration statement
effective in the near future, if at all. In the interim, we intend to fund our
operations based on our cash position and the near term cash flow generated from
operations, as well as additional borrowings. In the event we are able to
generate sales proceeds of at least $750,000 in our proposed offering, we
believe that the net proceeds of such sale, together with anticipated revenues
from sales of our products, will satisfy our capital requirements for at least
the next 12 months. However, we would require additional capital to realize our
strategic plan to expand distribution capabilities and product offerings. These
conditions raise substantial doubt about our ability to continue as a going
concern. Our actual financial results may differ materially from the stated plan
of operations. Our independent auditors have indicated in its report on our 2002
financial statements that our recurring losses from operations and our
difficulties in generating sufficient cash flow to meet our obligations and
sustain our operations raise substantial doubt about our ability to continue as
a going concern. Such qualification may hinder our ability to raise or obtain
the capital we require or have an adverse impact on the terms upon which we are
able to attract or obtain such capital. In addition, such qualification may
adversely impact our ability to attract and maintain new customer accounts.
Assuming that we receive net proceeds of at least $750,000 from our
proposed offering, we expect capital expenditures to be approximately $100,000
during the next 12 months, primarily for the acquisition of an inventory control
system. It is expected that our principal uses of cash during that period will
be to provide working capital, to finance capital expenditures, to repay
indebtedness and for other general corporate purposes, including sales and
marketing and new business development. The amount of spending for any
particular purpose is dependent upon the total cash available to us and the
success of our offering of common stock.
At December 31, 2002, we had liquid assets of $430,109, consisting of
cash and accounts receivable derived from operations, and other current assets
of $501,142, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $110,146 consisted
primarily of warehouse equipment used in operations.
Current liabilities of $2,155,241 at December 31, 2002 consisted
primarily of $1,470,776 of accounts payable and accrued expenses and $485,000
for notes payable, of which $230,000 was payable to our officers or our other
affiliates.
Our working capital deficit was $1,223,990 as of December 31, 2002 for
the reasons described above.
During the year ended December 31, 2002, we used cash of $395,231 in
operating activities primarily as a result of the net loss we incurred during
this period.
During the year ended December 31, 2002, we used net cash of $2,580 in
investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of proceeds from the
issuance of notes payable, provided net cash of $399,883 during the year ended
December 31, 2002.
ITEM 7. FINANCIAL STATEMENTS.
The revised report of Michael Johnson & Co., LLC, our independent
auditors for the year ended December 31, 2001, on page F-2 attached hereto is
incorporated herein by reference thereto.
7
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTIONS 16(A) OF THE EXCHANGE ACT.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and persons who beneficially own more than 10 percent of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10 percent shareholders are required by the
Securities and Exchange Commission to furnish us with copies of all Section
16(a) forms they file.
Based solely upon our review of the copies of such forms furnished to
us during the year ended December 31, 2002, and representations made by certain
persons subject to this obligation that such filings were not required to be
made, we believe that all reports required to be filed by these individuals and
persons under Section 16(a) were filed in a timely manner, other than reports by
the following persons:
o Edward T. Whelan, one of our directors and a beneficial owner of more
than 10% of our outstanding shares of common stock, failed to file (i)
an Initial Statement of Beneficial Ownership of Securities on Form 3
(a "Form 3") upon his acquisition of shares, individually and as a
principal stockholder of Xcel Associates, Inc. ("Xcel") and Shannon
Investments, Inc., which are shareholders of the Company, in
connection with our reverse acquisition of Military Resale Group,
Inc., a Maryland corporation ("MRG-Maryland"), in November 2001 and
(ii) a Statement of Changes in Beneficial Ownership on Form 4 (a "Form
4") upon several subsequent transactions, including his acquisition of
compensatory shares in December 2001, his acquisition of shares during
2002 pursuant to consulting agreements and executive compensation
arrangements with the Company, the acquisition of shares by Grace
Holdings, Inc., a company controlled by Mr. Whelan ("Grace"), during
2002, and the disposition of shares pursuant to gifts by Xcel and Mr.
Whelan in 2002.
o Edward Meyer, a beneficial owner of more than 10% of our outstanding
shares of common stock, failed to file (i) a Form 3 upon the
acquisition of shares, individually and as a principal stockholder of
Xcel in connection with our reverse acquisition of MRG- Maryland in
November 2001 and (ii) a Form 4 upon several subsequent transactions,
including his acquisition of shares during 2002 pursuant to a
consulting agreement with the Company, the disposition of shares
pursuant to gifts by Xcel in 2002 and the acquisition of shares
pursuant to a gift in 2002.
o Richard Tanenbaum, one of our directors and a beneficial owner of more
than 10% of our outstanding shares of common stock, failed to file (i)
a Form 3 upon the acquisition of shares in connection with our reverse
acquisition of MRG-Maryland in November 2001 and (ii) a Form 4 upon
the acquisition of shares pursuant to a gift in 2002, the acquisition
of shares during 2002 by several trusts of which Mr. Tanenbaum serves
as trustee and the receipt by such trusts of convertible promissory
notes issued by the Company during 2002 which are convertible into
shares of our common stock.
o Ethan Hokit, one of our directors, failed to file (i) a Form 3 upon
the acquisition of shares in connection with our reverse acquisition
of MRG-Maryland in November 2001 and.(ii) a Form 4 upon his
acquisition of compensatory shares in December 2001.
o Atlantic Investment Trust, a beneficial owner of more than 10% of our
outstanding shares of common stock, failed to file (i) a Form 3 upon
the acquisition of shares during 2002 by it and Grace, its
wholly-owned subsidiary, pursuant to gifts and (ii) a Form 4 upon
several subsequent transactions, including the receipt of convertible
promissory notes issued by the Company during 2002 which are
convertible into shares of our common stock and the acquisition of
shares by Grace during 2002.
8
Except as disclosed, we are not aware of any transactions in our
outstanding securities by or on behalf of any director, executive officer or 10
percent holder, which would require the filing of any report pursuant to Section
16(a) during the year ended December 31, 2002 that has not been filed with the
Securities and Exchange Commission.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of March 31, 2003 certain information
regarding the beneficial ownership of our common stock by (a) each person who is
known to us to be the beneficial owner of more than five percent (5%) of our
common stock, (b) each director and executive officer and (c) all directors and
executive officers as a group. Except as otherwise indicated, the persons or
entities listed below have sole voting and investment power with respect to all
shares of common stock beneficially owned by them, except to the extent such
power may be shared with a spouse.
Shares of Common
-----------------------------------
Stock Owned (1)
Name and Address Amount %
------------------------- ------------- -----------
Richard H. Tanenbaum ................... 2,696,139(2) 21.4%
7315 Wisconsin Avenue
Suite 775N
Bethesda, MD 20814
Edward T. Whelan ....................... 1,976,125(3) 16.5%
135 First Street
Keyport, NJ 07735
Edward Meyer, Jr ....................... 1,856,137(4) 15.5%
25 Sheffield Drive
Freehold, NJ 07728
Atlantic Investment Trust .............. 1,711,139(5) 13.6%
7315 Wisconsin Avenue
Suite 775N
Bethesda, MD 20814
The Tucker Family Spendthrift
Trust ................................ 863,454 7.2%
2500 N. Military Trail
Suite 225
Boca Raton, FL 33341
The Calvo Family Spendthrift
Trust ............................... 863,453 7.2%
1941 SE 51st Terrace
Ocala, FL 34471
Grace Holdings, Inc. ................... 856,126 7.1%
7315 Wisconsin Avenue
Suite 775N
Bethesda, MD 20814
9
Shares of Common
-----------------------------------
Stock Owned (1)
Name and Address Amount %
------------------------- ------------- -----------
Ethan D. Hokit....................... 530,000(6) 4.4%
3305 Blodgett Drive
Colorado Springs, CO 80919
Directors and executive officers as
a group (three persons)............ 4,346,138 34.6%
------------------
(1) For purposes of this table, information as to the beneficial ownership of
shares of our common stock is determined in accordance with the rules of
the Securities and Exchange Commission and includes general voting power
and/or investment power with respect to securities. Except as otherwise
indicated, all shares of our common stock are beneficially owned, and sole
investment and voting power is held, by the person named. For purposes of
this table, a person or group of persons is deemed to have "beneficial
ownership" of any shares of our common stock which such person has the
right to acquire within 60 days after the date of this Report. For purposes
of computing the percentage of outstanding shares of our common stock held
by each person or group of persons named above, any shares which such
person or persons has the right to acquire within 60 days after the date of
this Report is deemed to be outstanding but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
The inclusion herein of such shares listed beneficially owned does not
constitute an admission of beneficial ownership.
(2) Includes 685,000 shares owned directly by Mr. Tanenbaum, 1,711,139 shares
beneficially owned by Atlantic Investment Trust, of which Mr. Tanenbaum
serves as trustee, and 300,000 shares beneficially owned by Eastern
Investment Trust, of which Mr. Tanenbaum serves as trustee.
(3) Includes 220,000 shares owned directly by Mr. Whelan, 856,126 shares owned
of record by Grace Holdings, Inc., of which Mr. Whelan is President,
400,000 shares of record by Shannon Investments, Inc., which is controlled
by Mr. Whelan for the benefit of his family, and 499,999 shares of record
by Xcel Associates, Inc., of which Mr. Whelan is a principal shareholder.
(4) Includes 1,165,320 shares owned directly by Mr. Meyer, 499,999 shares owned
of record by Xcel Associates, of which Mr. Meyer is a principal shareholder
and 190,818 shares owned of record by Mr. Meyer's spouse.
(5) Includes 555,013 shares owned of record, 300,000 shares issuable upon the
conversion of $50,000 principal amount of convertible bridge note
indebtedness and 856,126 shares owned by Grace Holdings, Inc., a
wholly-owned subsidiary of Atlantic Investment Trust.
(6) Includes 400,000 shares of our common stock owned of record by Mr. Hokit's
spouse.
10
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.11 Form of 9% Convertible Note.
10.14 Warehousing and Distribution Agreement dated as of May 2, 2002 between
our company and Chattem Consumer Products. (Certain portions of this
Exhibit have been omitted pursuant to our request for confidential
treatment).
99.1 Certification of Principal Executive Officer, Edward T. Whelan,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer, Ethan D. Hokit, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in Colorado Springs,
Colorado, on June 17, 2003.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
---------------------------------------
Ethan D. Hokit
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates stated:
SIGNATURE TITLE DATE
/s/ Edward T. Whelan Chairman of the Board, Chief Executive June 17, 2003
-------------------------------------- Officer (Principal Executive Officer)
Edward T. Whelan
/s/ Ethan D. Hokit President, Chief Operating Officer, Director June 17, 2003
-------------------------------------- (Principal Accounting Officer and
Ethan D. Hokit Principal Financial Officer)
/s/ Richard H. Tanenbaum Director June 17, 2003
--------------------------------------
Richard H. Tanenbaum
12
CERTIFICATION
I, EDWARD T. WHELAN, CHIEF EXECUTIVE OFFICER of MILITARY RESALE GROUP,
INC., certify that:
1. I have reviewed this Amendment No. 1 to Annual Report on Form
10-KSB/A of Military Resale Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 17, 2003
/s/ Edward T. Whelan
-----------------------------------
Edward T. Whelan
Chief Executive Officer
13
CERTIFICATION
I, ETHAN D. HOKIT, CHIEF FINANCIAL OFFICER of MILITARY RESALE GROUP,
INC., certify that:
1. I have reviewed this Amendment No. 1 to Annual Report on Form
10-KSB/A of Military Resale Group;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 17, 2003
/s/ Ethan D. Hokit
-----------------------------------
Ethan D. Hokit
Chief Financial Officer
14
REPORT OF INDEPENDENT AUDITORS
Independent Auditor's Report
Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Military Resale Group, Inc. for the year ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
difficulties in generating sufficient cash flow to meet its obligation and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Military
Resale Group, Inc for the year ended December 31, 2001, and, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 19 to the financial statements, certain errors were
discovered by the Company, which resulted in an understatement of expenses
totaling $280,000 as of December 31, 2001. Accordingly, the 2001 financial
statements have been restated to correct the error.
/s/ MICHAEL JOHNSON & CO., LLC
Denver, Colorado
February 18, 2002 (except for Note 5 and 19 as to which the date is May 1, 2003)